Baroness Miller of Chilthorne Domer: My Lords, we on these Benches also welcome the Statement. It gives us just the skeleton and will be fleshed out by the formal national allocation plan and a lot of my questions will be reserved for that phase of the business. However, phase 2 is important and is one of the main tools that this country has for getting us on track to meet our Kyoto targets. Now that we have reached phase 2, we have to avoid some of the failures of phase 1.
	One of the most difficult things across industry and for the public of phase 1 is that it was not very clear that the polluter pays. This issue got lost in a blizzard of figures, percentages and statistics. People really want to now whether this is being effective in reducing carbons admissions.
	The Minister said that the provision would cover 45 per cent of our admissions of the sectors included. That is critical. The Minister has been silent on a couple of areas because they will fall within the fuller plan, and on whether aviation and transport in any form will be included in the full plan. There is a disconnect with which the Government I am sure struggles, which is common in every government in Europe—that is, we have national allocation plans within a single market.
	At the moment energy and the allocating plans are a national matter. That makes it very difficult. Will the Minister give his reaction to the setting of the German levels? When we reach phase 3, will there be any thought of setting the levels at a European level and therefore making sure that no country falls for the temptation of setting a lower level on the basis of safeguarding its industries?
	I was cheered to hear the Minister make the announcement about the Defra/DTI Environmental Transformation Fund. Is the intention that the auctioning process will produce the revenue for the fund? It was not clear to me where the revenue would come from. I imagine that the Government have thought about the size of the fund. I see that the scale and scope of it will be announced in the spending review for implementation in 2008, so there is a while to wait. Will the Minister give some idea where the proceeds from the auction will go?
	I have a couple of final questions on the shape of the national allocation plan. What sort of incentives will there be to ensure that new entrants invest in low carbon fuels and efficient technologies? Again for new entrants, will there be clear definitions and consistent applications of the relevant provisions to support incentive structures and fairness? For the plants for which closure is the only option, will this scheme sufficiently push to close those old, inefficient and highly polluting plants?
	These Benches welcome this very important tool. It takes us through to 2012. If the first phase was a learning curve for not making the same mistakes in the second phase, perhaps it is disappointing that we have not ironed out all the faults. Early on in this 2007–08 period we must ensure that by the time we get into the post-Kyoto scenario, which will be phase 3, the scheme is as perfect as possible at a European level.

Lord Rooker: My Lords, I am grateful for the responses of the noble Lord and the noble Baroness, not least because they have kept off some of the technical stuff in what is quite a complicated Statement. I am doubly grateful to the noble Baroness because she opened her remarks by saying that she would save most of her questions for when we make the final allegation plan, which has to be done by 31 December. I look forward to being more onboard then.
	I am very pleased that nobody has questioned that there is a real problem—that is very important for business and the wider population. There is a major problem out there; the science is clearly with us; and there are disputes about it. On a visit to one of the department's laboratories the other day, I came across a couple of facts that have stayed with me. Things were explained in a way that puts the matter across to ordinary bods and industry. For example, the amount of fresh water lost from the Greenland ice cap in recent years is enough to cover France to a depth of 35 kilometres. That is an enormous change. The other fact is that of the 10 hottest years ever recorded, nine of them were in the past 10 years. So something is happening out there which we must get a grip on. Climate change is a major issue.
	I did not understand the surprise of the noble Lord, Lord Dixon Smith, about the Statement. We were obliged to make a Statement by 30 June, and we have done so. We have met that commitment.
	We did a lot more than others in phase 1 and the proposed cap moves us towards our domestic target and confirms our position as leaders in the climate change debate. We make no apology for wanting to be a leader in the debate, as the Prime Minister has made absolutely clear. The commission has sent a very strong message about expectations of member states. Colleagues are quite right to ask about that.
	The recent article in the Financial Times by Commissioner Dimas stated that the Commission will use all political and legal tools at its disposal to ensure that national plans are fully consistent with Kyoto commitments and the verified data, so that there is a scarcity on the market and a level playing field for all participants. It has stated its intention to use actual, verified emissions from 2005 as a starting point for assessing member states' national allocation plans. That will mean more significant cuts from the majority of other member states. That makes the point that the noble Baroness asked about: we have information from phase 1. We did not have it before we started. So we are moving forward.
	The United Kingdom supports the messages from the Commission. We are actively lobbying to ensure that all member states set caps in line with the requirements of the directive to ensure real scarcity in the market. Ministerial calls are being made to Germany, France, Spain and Italy to build support across Europe for that leadership.
	On the level of auction and the 7 per cent figure, a range of factors were listed in the consultation. I understand that, at the moment, there is no auction and the figure may move to 10 per cent. The figure of 7 per cent takes into consideration the 20 million tonnes of CO2 that we think are missing from phase 1. I have seen constant references to that. Those in the know, which I presume includes those on the two Opposition Front Benches, will understand that there is an issue about a missing 20 million tonnes. The consideration of the auction takes account of that.
	The fund is a major opportunity. We will grasp the opportunity of the new fund to invest in renewable energy, non-nuclear low-carbon technologies and energy efficiency. There are a range of issues associated with that to deal with. Indeed, one of the Select Committees of your Lordships' House is undertaking an inquiry into biomass energy and use of fuel. So a lot of work is going on.
	The question that the noble Baroness asked about aviation and transport is wholly legitimate. It is like the dog that did not bark. I understand that the Commission is due to adopt proposals to include aviation later this year. We hope that aviation can be included in phase 2 and we are considering extending that to other sectors in later phases and working with the Commission on that.
	As I said, we are now in the second year of the first phase of the scheme. The results from year one have provided a first opportunity to judge allocations against emissions. As has been implied from what happened in the market earlier this year, it has been discovered that most member states' caps do not provide the scarcity that the scheme demands. The UK cap is 245 million tonnes and I understand that our system has worked quite well.
	As for the environmental transformation fund using the proceeds from the auction, the decisions on the fund must be part of the normal process of public expenditure decision-making, as was mentioned in the Statement. The fact that we are auctioning 7 per cent of allowances will create receipts that will improve the expenditure context. That is new money designed to channel money into investment in renewables and low-carbon technologies.
	If we use our brains and our innovation, we are on the cusp of helping to create in this country whole new industries in which we can almost repeat the Industrial Revolution in our offering to the rest of the world. We have an early start in many ways, and there are many examples from around the country of attempts at renewables, which, as I say, give us enormous potential.
	New entrants will receive a level of allocation that incentivises the best available technologies. That is the only answer that I can give the noble Baroness. This is important; we want new entrants, but we want them to be incentivised. The whole scheme is a very low-cost way of introducing low-carbon technologies.
	So far as future plans are concerned, the Commission is reviewing the directive and drafting a proposal to amend it, and we are already working with the Commission to ensure that lessons are learnt.
	Finally, the noble Baroness asked about some of the older plants and how we will make inefficient plants close. Events will encourage investment in low-carbon technology. A stronger cap across all member states will stimulate demand in the carbon market and encourage investment in cleaner technology. The whole point of trading is that the Government do not decide which plant closes; businesses do. In other words, it is a commercial decision. That is the whole point. If we can build that in, we do not get political or non-market inference; we get something that makes people outside see that it is worth investing in change. That is the best way in which to bring about change. It is certainly preferred above all state direction. We must have a level playing field, which is why we have to work within the context of the EU.

Lord Crickhowell: My Lords, I welcome the Statement on this important subject and the Government's decision to set the cap at the top end of the range of effort on which they consulted. But the cost of carbon alliances, and therefore their impact, is driven, as the Statement pointed out, by the cumulative effect of all member states' decisions and the level of ambition of individual member states.
	The review published this week by the Carbon Trust chief economist pointed out that if member states do not demand sufficiently large emissions reductions, the system will unravel and be ineffective. It is now clear that, during phase 1, there was considerable over-allowance by individual member states and by member states collectively. As the Statement put it,
	"most member states' caps for phase 1 do not provide the scarcity the scheme demands".
	It follows that cuts in allowances for phase 2 must not relate to those made in phase 1, but need to be assessed against a baseline on the recalculated 2005 emissions data that are now available.
	The Minister said that the UK will expect more stringent caps to be enforced in phase 2, and will support the European Commission in its efforts to ensure tough caps. Good—I welcome that—but will the Government make every possible effort to ensure that the reductions are made from the revised data and not from the over-allowances for phase 1? I think the Minister began to indicate that that was the Government's position when he responded to a previous question, but I think it is the crucial issue on which the industry awaits an answer. Can he also assure me that the UK has given the lead by calculating our allowances on that basis?